Issues in the Measurement and Encouragement of Business Saving

In 1981, personal saving in the United States was $106.6 billion, or 4.4 percent of personal income? Net corporate saving, as defined by undistributed profits net of estimated economic depreciation, was $49.5 billion, or 44.0 percent of after-tax corporate profits? Thus, net private saving was just 6.0 percent of net national product, which was $2.6 trillion. This level of savings is low by historical standards even in the United States, where savings as a fraction of income has always been low compared to most other industrialized countries. Moreover, it also appears to represent a shift in the composition of private savings, from the business to the personal sector. These trends are shown in Table 1. Total private saving was between 8 and 10 percent of NNP for most of the 1960s, and business saving represents almost half this total. Total private saving shrunk in the 1970s, especially in the last few years, but business saving has fallen even more. This low rate of saving in the United States, particularly by corporations, provided much of the impetus for the inclusion of several of the "supply side" components in the Economic Recovery Tax Act, notably the acceleration of depreciation allowances, the reduction in the top marginal tax rate on personal "unearned" income, expanded Individual Retirement Accounts, All-Savers’ certificates and the reduction in estate taxes. That these provisions, each of which is targeted at individuals with well above the median family income, were generally supported by members of both parties indicates how strongly Congress feels about increased capital formation as a policy goal. This paper has several objectives. We begin with a discussion of business saving, what it is and what influences it. A key point to be made here concerns the proper definition of such saving. Next, we ask the more fundamental question whether it matters what business saving is, as distinct from a broader savings measure. Since corporations are, ultimately, owned by individuals, there would appear to be little importance to the identity of the saver. However, analysts have traditionally looked at business saving as at least partially independent from household behavior. While such an approach may rest on assumptions about the separation of ownership and control of corporations, or the inability of stockholders to "pierce the corporate veil," it may also be explained by the structure of the income tax.